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US CPI preview March 2023: forecasting a significant drop in headline CPI growth, but higher core CPI growth
As more of last year's gasoline price surge rolls out of the YoY calculation, headline CPI growth is expected to fall significantly, but core CPI inflation risks a bigger policy mistake.
On a non-seasonally adjusted basis, I forecast MoM growth of 0.5% for the CPI and 0.6% for the core CPI.
On a YoY basis, I forecast the CPI’s growth rate to fall from 6.0% to 5.2%., and the core CPI’s growth rate to rise from 5.5%, to 5.7%.
Consensus is forecasting YoY CPI growth of 5.2% (in-line with my forecast), and core CPI growth of 5.6% (slightly below my forecast).
The main driver of my forecast for a significant reduction in the YoY rate of headline CPI growth, is an expected significant YoY decline in the CPI’s energy commodities index, as more of last year’s major increase in oil & gasoline prices drops out of the YoY calculation.
My forecast for higher YoY core CPI growth in March, as well as the potential for it to remain around current growth rates for some additional months to come (given the impact of durables prices having already disinflated and the lagging nature of services price changes), risks a more significant policy mistake from the Fed, which focuses on lagging, as opposed to leading, price indicators.
Durables prices are expected to see material MoM growth as wholesale used car price growth begins flowing through
While the Manheim Used Vehicle Value Index (Manheim Index) has been recording significant MoM price growth since January (non-seasonally adjusted data), a return to MoM price growth hadn’t been seen in the CPI’s used cars and trucks index, which tracks retail prices, whereas the Manheim Index tracks wholesale prices.
Though with the CPI’s used cars and trucks index typically lagging the Manheim Index by 2 months, March’s CPI is expected to see material growth in used car prices, given the increase in the Manheim Index in January.
Given that the Manheim Index has continued to record significant gains in February and March, I forecast a slightly higher MoM increase in CPI used car prices than what a simple readthrough of January’s Manheim Index would suggest (1.7% in the CPI vs 1.5% in the Manheim Index).
The rise in used car prices is expected to contribute to MoM durables price growth that is noticeably above its historical average for the first time since August 2022.
Though with durables prices having already not just disinflated, but reverting to outright YoY deflation, it shouldn’t be unexpected for durables prices to record some months of MoM price growth that is above its historical average.
Food at home prices expected to see further YoY moderation
CPI food at home prices are forecast to see a continued moderation in their YoY growth rate in March.
This comes as MoM CPI food at home price growth has moderated significantly over recent months, and as the UN FAO Food Price Index (which typically leads CPI food at home prices by ~6 months) continues to point to a further moderation in CPI food at home price growth.
The YoY change in the UN FAO Food Price Index is now -20.5%.
Gasoline prices rise MoM, but CPI energy commodities are expected to turn double-digit YoY negative as high comparables roll off
While EIA data shows that regular all formulations gasoline prices saw their 3rd consecutive monthly average increase in March, CPI energy commodities are nevertheless expected to turn significantly YoY negative as the massive 19.6% MoM increase in March 2022 rolls out of the YoY calculation.
This is expected to drive a significant further deceleration in the headline CPI’s YoY growth rate.
MoM rent measures stagnate in February, but downside pressure remains
The manner in which the CPI’s rent based indicators are measured, means they lag spot market rents.
In order to help determine where the CPI’s owners’ equivalent rent (OER) and rent of primary residence (RPR) indicators are heading, it is thus important to look at indicators that measure spot market rents.
One such measure, is Apartment List’s Rent Estimate Index (ALRE). Since peaking at a YoY growth rate of 18.0% in November 2021, it has fallen to 2.7% in March 2023.
Given this underlying movement in spot market rents, the CPI’s lagging rent based measures would be expected to decelerate significantly in time.
In terms of when that significant deceleration might occur, after seeing MoM growth consolidate at high levels, the CPI’s rent based measures saw a noticeable tapering of MoM growth in January.
A consolidation phase, followed by a noticeable moderation in MoM growth, is an important sign that CPI rents have sufficiently caught up to spot market rents, as the nature by which CPI rents are calculated, means that they not only lag spot market rents, but that they move in a smoothed manner.
Given a continued moderation in spot market rent growth, this indicates that OER and RPR are set to see a gradual reduction in their MoM growth rates over time. For this reason, I forecast some additional tapering of MoM OER and RPR growth in March.
After contributing to high services price growth, motor vehicle maintenance prices decelerated in February: will it continue?
A key factor that has been contributing to higher than usual CPI services price growth, has been motor vehicle maintenance. After reaching a YoY growth rate of 14.2% in January 2023 following month after month of relatively high price growth, both the YoY and MoM growth rate slowed in February.
While a positive sign, one month does not make a trend. For that reason, I continue to forecast a return to relatively high MoM growth in March, but to a lesser extent than what was seen in January.
Given the Fed’s focus on services prices, it will be important to see whether price growth for motor vehicle maintenance returns to its recent trend of high MoM growth, or instead delivers another month of relatively low MoM growth, suggesting the emergence of a new trend.
Forecasting MoM growth of 0.5% for headline CPI, 0.6% for core CPI
Putting everything together, I am forecasting MoM growth of 0.5% for the overall CPI (non-seasonally adjusted).
While this may seem elevated, it is largely in-line with its historical average change in March, which has traditionally been the hottest month for CPI growth.
It’s a different story for the core CPI, where my estimate for MoM growth of 0.6% (0.55% to two decimal places) remains well above its historical average.
Forecasting YoY headline CPI growth of 5.2%, core CPI growth of 5.7%
With the large MoM increase in March 2022 set to drop out of the YoY calculation, I forecast a significant reduction in the CPI’s YoY growth rate, falling from 6.0% in February to 5.2% in March.
This would mark the lowest rate of growth since May 2021.
Though given that the large moderation in the headline CPI is expected to be driven by a large YoY decline in energy commodity prices, I forecast an increase in the core CPI’s YoY growth rate, from 5.5% to 5.7%.
CPI ex-shelter forecast to plunge, core CPI ex-shelter forecast to see a modest increase
Remembering that the highly significant shelter component is a lagging metric that is set to turn lower overtime, it’s important to also analyse the CPI on an ex-shelter basis.
This reveals an even more significant plunge in the CPI in March, which is expected to fall to 3.7%, from 5.0% in February. This would mark the lowest YoY growth rate since March 2021.
While I forecast a modest increase in the YoY rate of core CPI ex-shelter price growth from 3.7% to 3.8%, the lower growth rate indicates much less of a problem than the overall core CPI suggests.
The Fed’s focus on lagging services prices, as opposed to leading price indicators, risks further overtightening
While many may focus their attention on the core CPI, this misses much of the bigger picture. For in the current cycle, nondurables prices (which includes food and energy), were the second key category to rise and fall. Given that durables prices have already disinflated, looking at inflation on an ex-food and energy basis means that the 2nd key component of the disinflation cycle is largely ignored.
With services prices the most lagging, and durables prices having already disinflated, this will put pressure on core CPI growth to rise/stagnant over the months ahead, as it largely ignores the 2nd key phase of the disinflation cycle. As such, it’s likely to remain particularly elevated until the 3rd and final phase of the disinflation cycle (being a peak and fall in services prices) kicks in.
This risks significant further overtightening from the Fed, whilst the more leading indicators of the M2 money supply and durables prices, say that high inflation should no longer be the primary concern. Nondurables prices are likely to soon be saying the same thing.
Instead, the bigger concern should be the risk of deflationary bust, which further Fed tightening would significantly increase the odds of occurring.
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